More families will lose their homes, charities warn, as the Government
prepares to reduce the amount of financial support it provides to borrowers
by as much as £200 a month.

The latest repossession statistics showed numbers dropping after the Government introduced several measures for home owners who lost their jobs amid the economic downturn.

But some of this support is now being reduced. It includes Support for Mortgage Interest, which is paid to those on income-related benefits – such as Job Seeker’s Allowance – at a rate of 6.08 per cent.

The rate is paid regardless of how much a borrower actually pays to their lender – so it could mean that a home owner potentially ends up with a surplus of Government cash after paying out a lower mortgage rate to their bank.

This has prompted the Government to announce that it is cutting the rate to just 3.75 per cent from October 1. The new rate is based on the average mortgage rate provided by the Bank of England.

But charities warned the new rate will be too low for many home owners who will be left with a significant shortfall if they are still paying a higher mortgage rate.

The 2.33 per cent cut in Support for Mortgage Interest Support equates to as much as £202 less a month or £2,424 less a year on a typical £150,000 mortgage.

Debt charity the Consumer Credit Counselling Service said the decline would “aggravate” the level of repossessions.

Malcolm Hurlston, chairman of CCCS, said: “The cut in Support for Mortgage Interest will make it harder, and in some cases impossible, for many people to stay in their homes.”

It comes after Shelter warned earlier this year that more than five million home owners will be unable to afford a rise in interest rates and will be in danger of being evicted from their homes.

While repossessions are lower than originally feared, home owners with tracker mortgages will see their monthly repayments rise if interest rates go up. Many borrowers who have come to the end of their original deal have already seen their costs increase.

Repossessions fell to 9,400 in the three months between April and June, down from 9,800 in the previous three months and 11,800 during the same period a year earlier, according to the Council of Mortgage Lenders.

The CML has revised its forecast for the number of repossessions this year from 53,000 to 39,000.

Separate research by mortgage brokers Coreco and Mortgage Advice Bureau suggests the average deposit has shrunk from 32.5 per cent of the value of a property in June to 29 per cent last month.

A spokesman for the Department for Work and Pensions said: “We’re changing the rate at which we pay Support for Mortgage Interest because currently over 90 per cent of people are getting more than they actually pay out in mortgage interest each month – this is unfair to the taxpayer and not a good use of public funds.

"Using the Bank of England rate will ensure that people still get the help they need with their mortgage interest payments.”